Yahoo could use position to leverage better deal

Commentary: Stakes in Asia could be used for creative financing

SAN FRANCISCO (MarketWatch) -- It has become pretty clear that Yahoo CEO Jerry Yang does not want to merge the company he co-founded as a Stanford student with Microsoft.

After Microsoft Corp.'s
MSFT, +1.28%
unwanted overture on Friday, many on Wall Street have been speculating that Yahoo
YHOO, +0.82%
will not be able to get out from under the grizzly-bear hug from Redmond, given the premium in Microsoft's $44 billion offer for Yahoo, at $31 a share.

But the company does have some other options. Cashing in its hefty stakes in two Asian ventures may be one way to escape Microsoft's unwanted advances.

Google CEO Eric Schmidt called Yang over the weekend, and likely is suggesting some other options as well. Analysts speculate that Schmidt could be offering a revenue-sharing deal associated with search, or offer to outsource search for Yahoo, as some Wall Street analysts have been recommending.

I think Schmidt may also be looking at buying Yahoo's hefty stake in Alibaba.com Ltd. (1688), the Chinese e-commerce company. According to its last detailed quarterly statement filed with the Securities and Exchange Commission, Yahoo had a 40% stake.

And if Schmidt is not interested in it, it has got to be one of Yahoo's best options to help save itself. Yahoo's stake in Alibaba, plus its stake in Yahoo Japan were valued at about $17.6 billion, according to a Stanford Bernstein analyst who highlighted this in a report last month.

The theory is that Yahoo could use the funds it gets in a sale of its stakes in both Alibaba and Yahoo! Japan, and possibly use that cash for a big share repurchase, or as a way to get other investors on board to buy the company, or take it private.

But some Silicon Valley banking sources point out that going private or getting money from private equity firms is an unlikely option. Not impossible, but unlikely.

"I think they are looking at everything," said one Silicon Valley source. "Everything has to be on the table."

Some players in the private equity arena said Microsoft's offer is very hard to match, with a 62% premium is just too rich for private equity to compete with now, especially with the current state of the debt market. And that is why Microsoft's offer was so shrewd, because it is so high it makes it very difficult for most companies to match.

A report in the Financial Times late Monday said that Yahoo is indeed examining ways to unlock the value of these assets in Asia, quoting an unnamed source.

It is not clear how Yahoo could make up the difference in the offer from Microsoft to shareholders. One back-of-the-envelope calculation from one investor concluded that if Yahoo were to get $17.6 billion in cash for its Asian assets, and use its own cash and equivalents pile of about $2.1 billion, it would still be saddled with more than $20 billion in debt to service, if it could find investors and banks willing to back such a deal.

Any private equity deal makers would also want to swoop in quickly and get rid of any non-performing businesses and make the kind of cost cuts that Yang has not been able to do. The company, which is facing fierce competition from Google in Internet search, said it will "realign" 1,000 jobs, but it is not clear if they will all be layoffs or moves to other areas.

There is precedence in the private equity world of a deal to unlock the value of a particular stake. In late 2000, the private equity firm Silver Lake of Menlo Park took the disk drive maker Seagate Technology
STX, -0.10%
private, in one of the very first big private deals in the tech industry. The $20 billion deal was done for one big reason - to unlock Seagate's lucrative 33% stake in Veritas, which is now owned by Symantec Corp.
SYMC, +0.76%
The Veritas stake was sold back to Veritas and Silver Lake bought Seagate's operations for cash. Seagate eventually went public again.

Times are much different now, though, for any private equity deals involving big amounts of debt, with the credit crunch having wreaked havoc on the markets. Especially with a competitive bidder standing by, ready with a hefty price in cash and stock.

Yahoo, for now, has some time to work on a plan. Microsoft did not give the company an immediate deadline.

"Yahoo has time, which gives them room to maneuver and gives them the opportunity to consider partial transactions that might create value for the company," said David Garrity, director of research at Dinosaur Securities in New York. He noted that Yahoo's new chief financial officer Blake Jorgensen, who co-founded and was an investment banker at Thomas Weisel Partners, is probably "actively considering any and all strategies to return value to shareholders and remain independent."

Let's hope that Yang and Co. are better are creative financing and cutting deals than they are at turning companies around. If not, they are going to have to get used to nicknames like Micro-hoo.

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